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Thursday, 26 January 2012

Recession Looms As UK Economy Shrinks By 0.2%

It is the first quarter of negative growth for a year and the fall was slightly more than expected.

The contraction in Gross Domestic Product (the value of all goods and services produced) marks a sharp slowdown on the 0.6% rise in the previous three months of 2011, and fuels fears of a double-dip recession.

If this figure is not revised upwards and there is another contraction in the first quarter of 2012, the UK will be plunged back into recession.

Negative growth in the final three months of last year was driven by a 0.9% fall in manufacturing, a 4.1% drop in electricity and gas production as the warm weather caused people to turn down heating, and a 0.5% fall in the construction sector.

Output in the service industry remained flat and government contracts were up by 0.4%.

GDP over the whole of 2011 grew by 0.9%, compared with growth of 2.1% in 2010.

Continuing problems in the eurozone have been significantly hampering growth.

Unemployment also recently hit a 17-year high.

The fourth-quarter decline leaves Chancellor George Osborne open to fresh criticism that his austerity measures are choking off the economy.

But Mr Osborne insisted he would stick to his plans.

He added: "These are disappointing figures about what happened to the economy at the end of last year but they are not entirely unexpected because of what's happening in the world and what's happening in the eurozone crisis.

"And they are similar to what our independent forecaster predicted in November.

"Now Britain has substantial economic problems, debt built up over the past 10 years, and we are dealing with those, but the truth is that dealing with those problems is made more difficult by the situation in the eurozone."

The growth figures reinforce expectations that the Bank of England will inject more cash into the economy next month in an attempt to stimulate growth.

The bank's governor, Sir Mervyn King, has said that the UK faced an "arduous, long and uneven" road to recovery.

Mr King has so far resisted calls for another round of quantitative easing but negative growth will intensify the pressure.

James Knightley, an economist at ING Bank, said the GDP figures pointed to further economic gloom.

"Unfortunately, UK economic activity is likely to get worse before it gets better with a technical recession likely to be confirmed by GDP numbers for the first quarter of 2012.

"With such economic uncertainty, firms are reluctant to invest and hire so it is difficult to see where any growth will come from in the next couple of quarters."

But he said he is more optimistic about the second half of 2012, when falling inflation will help ease the squeeze on consumers' spending power, which has been behind much of the recent weakness in the economy.

Pressure on the BoE for another round of quantitative easing is increasing

The GDP figures follow data from the Office for National Statistics which showed that UK debt surpassed the £1trn barrier for the first time.

The International Monetary Fund has also downgraded its global outlook for growth.

The IMF's forecast for UK growth this year was cut by 1% to 0.6% - although Britain is still expected to outperform Germany and France.

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